Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended July 2, 2016

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number 1-4482

ARROW ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

New York
11-1806155
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
9201 East Dry Creek Road, Centennial, Colorado
80112
(Address of principal executive offices)
(Zip Code)

(303) 824-4000
(Registrant's telephone number, including area code)

No Changes
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  (do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x

There were 91,265,987 shares of Common Stock outstanding as of July 29, 2016.





ARROW ELECTRONICS, INC.

INDEX

 
 
 
Part I.
Financial Information
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Income
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
Signature
 

 


 

2




PART I.  FINANCIAL INFORMATION

Item 1.     Financial Statements

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)

 
 
Quarter Ended
 
Six Months Ended
  
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Sales
 
$
5,972,101

 
$
5,829,989

 
$
11,446,278

 
$
10,832,374

Costs and expenses:
 
 

 
 

 
 
 
 
Cost of sales
 
5,173,310

 
5,061,394

 
9,898,589

 
9,378,457

Selling, general, and administrative expenses
 
518,704

 
504,754

 
1,024,517

 
959,284

Depreciation and amortization
 
40,389

 
39,751

 
81,322

 
76,913

Restructuring, integration, and other charges
 
16,106

 
17,147

 
36,894

 
33,343

 
 
5,748,509

 
5,623,046

 
11,041,322

 
10,447,997

Operating income
 
223,592

 
206,943

 
404,956

 
384,377

Equity in earnings of affiliated companies
 
2,227

 
1,903

 
4,083

 
3,216

Interest and other financing expense, net
 
39,024

 
34,696

 
74,599

 
65,550

Other expense, net
 

 
1,500

 

 
2,435

Income before income taxes
 
186,795

 
172,650

 
334,440

 
319,608

Provision for income taxes
 
51,457

 
47,967

 
92,510

 
88,834

Consolidated net income
 
135,338

 
124,683

 
241,930

 
230,774

Noncontrolling interests
 
1,068

 
751

 
1,425

 
784

Net income attributable to shareholders
 
$
134,270

 
$
123,932

 
$
240,505

 
$
229,990

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.46

 
$
1.30

 
$
2.62

 
$
2.40

Diluted
 
$
1.45

 
$
1.28

 
$
2.59

 
$
2.37

Weighted-average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
91,782

 
95,638

 
91,647

 
95,776

Diluted
 
92,693

 
96,649

 
92,771

 
96,874


See accompanying notes.
 
 

3




ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Quarter Ended
 
Six Months Ended
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Consolidated net income
$
135,338

 
$
124,683

 
$
241,930

 
$
230,774

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(51,510
)
 
47,727

 
21,669

 
(150,660
)
Unrealized gain (loss) on investment securities, net
(2,030
)
 
2,169

 
(3,681
)
 
2,293

Unrealized gain (loss) on interest rate swaps designated as cash flow hedges, net
93

 
(230
)
 
184

 
693

Employee benefit plan items, net
3,844

 
882

 
4,764

 
1,724

Other comprehensive income (loss)
(49,603
)
 
50,548

 
22,936

 
(145,950
)
Comprehensive income
85,735

 
175,231

 
264,866

 
84,824

Less: Comprehensive income (loss) attributable to noncontrolling interests
(150
)
 
751

 
2,215

 
784

Comprehensive income attributable to shareholders
$
85,885

 
$
174,480

 
$
262,651

 
$
84,040


See accompanying notes.
    

4




ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)

 
 
July 2,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
495,771

 
$
273,090

Accounts receivable, net
 
5,704,633

 
6,161,418

Inventories, net
 
2,504,121

 
2,466,490

Other current assets
 
331,159

 
285,473

Total current assets
 
9,035,684

 
9,186,471

Property, plant, and equipment, at cost:
 
 

 
 

Land
 
23,723

 
23,547

Buildings and improvements
 
171,125

 
162,011

Machinery and equipment
 
1,322,470

 
1,250,115

 
 
1,517,318

 
1,435,673

Less: Accumulated depreciation and amortization
 
(779,767
)
 
(735,495
)
Property, plant, and equipment, net
 
737,551

 
700,178

Investments in affiliated companies
 
75,985

 
73,376

Intangible assets, net
 
365,603

 
389,326

Cost in excess of net assets of companies acquired
 
2,418,958

 
2,368,832

Other assets
 
313,025

 
303,747

Total assets
 
$
12,946,806

 
$
13,021,930

LIABILITIES AND EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
4,644,655

 
$
5,192,665

Accrued expenses
 
701,960

 
819,463

Short-term borrowings, including current portion of long-term debt
 
111,259

 
44,024

Total current liabilities
 
5,457,874

 
6,056,152

Long-term debt
 
2,619,003

 
2,380,575

Other liabilities
 
421,048

 
390,392

Equity:
 
 

 
 

Shareholders' equity:
 
 

 
 

Common stock, par value $1:
 
 

 
 

Authorized - 160,000 shares in both 2016 and 2015
 
 

 
 

Issued - 125,424 shares in both 2016 and 2015
 
125,424

 
125,424

Capital in excess of par value
 
1,092,323

 
1,107,314

Treasury stock (34,073 and 34,501 shares in 2016 and 2015, respectively), at cost
 
(1,475,671
)
 
(1,480,069
)
Retained earnings
 
4,914,985

 
4,674,480

Accumulated other comprehensive loss
 
(262,560
)
 
(284,706
)
Total shareholders' equity
 
4,394,501

 
4,142,443

Noncontrolling interests
 
54,380

 
52,368

Total equity
 
4,448,881

 
4,194,811

Total liabilities and equity
 
$
12,946,806

 
$
13,021,930

 
See accompanying notes.


5




ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
  
 
July 2,
2016
 
June 27,
2015
Cash flows from operating activities:
 
 
 
 
Consolidated net income
 
$
241,930

 
$
230,774

Adjustments to reconcile consolidated net income to net cash provided by operations:
 
 
 
 
Depreciation and amortization
 
81,322

 
76,913

Amortization of stock-based compensation
 
19,275

 
22,006

Equity in earnings of affiliated companies
 
(4,083
)
 
(3,216
)
Deferred income taxes
 
27,669

 
26,506

Excess tax benefits from stock-based compensation arrangements
 
(4,939
)
 
(5,842
)
Other
 
2,954

 
4,574

Change in assets and liabilities, net of effects of acquired businesses:
 
 
 
 
Accounts receivable
 
529,246

 
1,079,153

Inventories
 
(22,490
)
 
(82,825
)
Accounts payable
 
(606,678
)
 
(1,020,150
)
Accrued expenses
 
(114,741
)
 
(99,366
)
Other assets and liabilities
 
(38,137
)
 
(9,089
)
Net cash provided by operating activities
 
111,328

 
219,438

Cash flows from investing activities:
 
 
 
 
Cash consideration paid for acquired businesses
 
(45,473
)
 
(470,674
)
Acquisition of property, plant, and equipment
 
(88,336
)
 
(68,820
)
Other
 
(12,000
)
 
2,008

Net cash used for investing activities
 
(145,809
)
 
(537,486
)
Cash flows from financing activities:
 
 
 
 
Change in short-term and other borrowings
 
67,611

 
(3,817
)
Proceeds from long-term bank borrowings, net
 
233,000

 
34,400

Net proceeds from note offering
 

 
688,162

Redemption of notes
 

 
(254,313
)
Proceeds from exercise of stock options
 
14,844

 
14,474

Excess tax benefits from stock-based compensation arrangements
 
4,939

 
5,842

Repurchases of common stock
 
(46,833
)
 
(156,424
)
Other
 
(3,000
)
 
(3,000
)
Net cash provided by financing activities
 
270,561

 
325,324

Effect of exchange rate changes on cash
 
(13,399
)
 
(7,910
)
Net increase (decrease) in cash and cash equivalents
 
222,681

 
(634
)
Cash and cash equivalents at beginning of period
 
273,090

 
400,355

Cash and cash equivalents at end of period
 
$
495,771

 
$
399,721


See accompanying notes.
 

6




ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note A – Basis of Presentation

The accompanying consolidated financial statements of Arrow Electronics, Inc. (the "company") were prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at and for the periods presented.  The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.

These consolidated financial statements do not include all of the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the company's audited consolidated financial statements and accompanying notes for the year ended December 31, 2015, as filed in the company's Annual Report on Form 10-K.

Quarter End

The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter, except for the third quarter of 2015, which closed on September 26, 2015.

Reclassification

Certain prior period amounts were reclassified to conform to the current period presentation.

Note B – Impact of Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU No. 2016-13"). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718) ("ASU No. 2016-09"). ASU No. 2016-09 revises the accounting treatment for excess tax benefits, minimum statutory tax withholding requirements, and forfeitures related to share-based awards. ASU No. 2016-09 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted, and is to be applied using either a retrospective or a modified retrospective approach. The adoption of the provisions of ASU No. 2016-09 is not expected to have a material impact on the company's consolidated financial position or results of operations.

In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments (Topic 815) ("ASU No. 2016-06"). ASU No. 2016-06 clarifies the steps required to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. ASU No. 2016-06 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted, and is to be applied using a modified retrospective approach. Effective April 3, 2016, the company adopted the provisions of ASU No. 2016-06. The adoption of the provisions of ASU No. 2016-06 did not materially impact the company's consolidated financial position or results of operations.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU No. 2016-02"). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. ASU No. 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-02.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) ("ASU No. 2016-01"). ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments

7

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

to be recognized in net income. ASU No. 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-01.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740) ("ASU No. 2015-17"). ASU No. 2015-17 requires deferred tax liabilities and assets to be classified as noncurrent in the consolidated balance sheet. ASU No. 2015-17 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. ASU No. 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The adoption of the provisions of ASU No. 2015-17 is not expected to have a material impact on the company's consolidated financial position or results of operations.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330) ("ASU No. 2015-11"). ASU No. 2015-11 requires an entity to measure inventory within the scope of the update at the lower of cost and net realizable value, and defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Effective January 1, 2016, the company adopted the provisions of ASU No. 2015-11. The adoption of the provisions of ASU No. 2015-11 did not materially impact the company's consolidated financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes all existing revenue recognition guidance. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for interim and annual periods beginning after December 15, 2017, with early application permitted for interim and annual periods beginning after December 15, 2016. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In March, April, and May 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU No. 2016-08"); ASU No. 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing ("ASU No. 2016-10"); and ASU No. 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients ("ASU No. 2016-12"), respectively. ASU No. 2016-08, ASU No. 2016-10, and ASU No. 2016-12 provide supplemental adoption guidance and clarification to ASU No. 2014-09, and must be adopted concurrently with the adoption of ASU No. 2014-09. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, and ASU No. 2016-12.

Note C – Acquisitions

2016 Acquisitions

During the first six months of 2016, the company completed two acquisitions for $44,591, net of cash acquired. The impact of these acquisitions was not material to the company's consolidated financial position or results of operations. The pro forma impact of the 2016 acquisitions on the consolidated results of operations of the company for the first six months of 2016 and 2015 as though the acquisitions occurred on January 1 was also not material.

2015 Acquisitions

On March 31, 2015, the company acquired immixGroup, Inc. ("immixGroup"), for a purchase price of $280,454, which included $28,205 of cash acquired. immixGroup is a value-added provider supporting value-added resellers, solution providers, service providers, and other public sector channel partners with specialized resources to accelerate their government sales. immixGroup has operations in North America.

Since the date of the acquisition, immixGroup sales for the first six months of 2016 and 2015 of $225,726 and $96,524, respectively, were included in the company's consolidated results of operations.


8

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The following table summarizes the allocation of the net consideration paid to the fair value of the assets acquired and liabilities assumed for the immixGroup acquisition:
Accounts receivable, net
$
145,130

Other current assets
24,181

Property, plant, and equipment
1,569

Other assets
5,313

Identifiable intangible assets
46,400

Cost in excess of net assets acquired
183,840

Accounts payable
(136,921
)
Accrued expenses
(11,736
)
Other liabilities
(5,527
)
Cash consideration paid, net of cash acquired
$
252,249


In connection with the immixGroup acquisition, the company allocated $44,000 to customer relationships with a life of 13 years and $2,400 to amortizable trade name with a life of 5 years.
The cost in excess of net assets acquired related to the immixGroup acquisition was recorded in the company's global enterprise computing solutions ("ECS") business segment. The intangible assets related to the immixGroup acquisition are expected to be deductible for income tax purposes.
During 2015, the company completed nine additional acquisitions for an aggregate purchase price of approximately $263,341, net of cash acquired, inclusive of an initial 53.7% acquisition of Data Modul AG, and an additional 3.6% acquired subsequent to the original date of acquisition. The company also assumed $84,487 in debt in connection with these acquisitions. The impact of these acquisitions was not material, individually or in the aggregate, to the company's consolidated financial position or results of operations.

The following table summarizes the company's unaudited consolidated results of operations for the second quarter and first six months of 2015, as well as the unaudited pro forma consolidated results of operations of the company, as though the 2015 acquisitions occurred on January 1:
 
Quarter Ended
 
Six Months Ended
 
June 27, 2015
 
June 27, 2015
 
As Reported
 
Pro Forma
 
As Reported
 
Pro Forma
Sales
$
5,829,989

 
$
5,926,340

 
$
10,832,374

 
$
11,229,132

Net income attributable to shareholders
123,932

 
124,342

 
229,990

 
232,717

Net income per share:
 
 
 
 
 
 
 
     Basic
$
1.30

 
$
1.30

 
$
2.40

 
$
2.43

     Diluted
$
1.28

 
$
1.29

 
$
2.37

 
$
2.40

The unaudited pro forma consolidated results of operations do not purport to be indicative of the results obtained had these acquisitions occurred as of the beginning of 2015, or of those results that may be obtained in the future. Additionally, the above table does not reflect any anticipated cost savings or cross-selling opportunities expected to result from these acquisitions.
Note D – Cost in Excess of Net Assets of Companies Acquired and Intangible Assets, Net

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.


9

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Cost in excess of net assets of companies acquired, allocated to the company's business segments, is as follows:
 
 
Global
Components
 
Global ECS
 
Total
Balance as of December 31, 2015 (a)
 
$
1,230,832

 
$
1,138,000

 
$
2,368,832

Acquisitions and related adjustments
 
2,224

 
39,613

 
41,837

Foreign currency translation adjustment
 
2,359

 
5,930

 
8,289

Balance as of July 2, 2016 (a)
 
$
1,235,415

 
$
1,183,543

 
$
2,418,958


(a)
The total carrying value of cost in excess of net assets of companies acquired for all periods in the table above is reflected net of $1,018,780 of accumulated impairment charges, of which $716,925 was recorded in the global components business segment and $301,855 was recorded in the global ECS business segment.

Intangible assets, net, are comprised of the following as of July 2, 2016:
 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Trade names
 
indefinite
 
$
101,000

 
$

 
$
101,000

Customer relationships
 
10 years
 
494,506

 
(238,118
)
 
256,388

Developed technology
 
5 years
 
14,199

 
(10,203
)
 
3,996

Other intangible assets
 
(b)
 
7,903

 
(3,684
)
 
4,219

 
 
 
 
$
617,608

 
$
(252,005
)
 
$
365,603


(b)
Consists of non-competition agreements, sales backlog, and an amortizable trade name with useful lives ranging from two to five years.

Intangible assets, net, are comprised of the following as of December 31, 2015:
 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Trade names
 
indefinite
 
$
101,000

 
$

 
$
101,000

Customer relationships
 
10 years
 
498,319

 
(215,263
)
 
283,056

Developed technology
 
5 years
 
13,154

 
(7,894
)
 
5,260

Other intangible assets
 
(c)
 
917

 
(907
)
 
10

 
 
 
 
$
613,390

 
$
(224,064
)
 
$
389,326


(c)
Consists of non-competition agreements with useful lives ranging from two to three years.

During the second quarters of 2016 and 2015, the company recorded amortization expense related to identifiable intangible assets of $14,446 and $13,917, respectively.

During the first six months of 2016 and 2015, the company recorded amortization expense related to identifiable intangible assets of $27,359 and $25,024, respectively.

Note E – Investments in Affiliated Companies

The company owns a 50% interest in several joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and a 50% interest in Arrow Altech Holdings (Pty.) Ltd ("Altech Industries"), a joint venture with Allied Technologies Limited. As a result of one of the company's 2015 acquisitions, the company acquired a 50% interest in two immaterial joint ventures which are included in "Other" in the tables below. These investments are accounted for using the equity method.


10

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The following table presents the company's investment in the following joint ventures:
  
 
July 2,
2016
 
December 31,
2015
Marubun/Arrow
 
$
64,042

 
$
62,530

Altech Industries
 
9,311

 
8,261

Other
 
2,632

 
2,585

 
 
$
75,985

 
$
73,376

The equity in earnings of affiliated companies consists of the following:
  
 
Quarter Ended
 
Six Months Ended
  
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Marubun/Arrow
 
$
1,846

 
$
1,609

 
$
3,510

 
$
2,753

Altech Industries
 
317

 
201

 
518

 
332

Other
 
64

 
93

 
55

 
131

 
 
$
2,227

 
$
1,903

 
$
4,083

 
$
3,216


Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. At July 2, 2016, the company's pro-rata share of this debt was approximately $1,250. The company believes that there is sufficient equity in each of the joint ventures to meet their obligations. 

Note F – Accounts Receivable

Accounts receivable, net, consists of the following:
 
 
July 2,
2016
 
December 31,
2015
Accounts receivable
 
$
5,754,519

 
$
6,211,077

Allowances for doubtful accounts
 
(49,886
)
 
(49,659
)
Accounts receivable, net
 
$
5,704,633

 
$
6,161,418


The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  The allowances for doubtful accounts are determined using a combination of factors, including the length of time the receivables are outstanding, the current business environment, and historical experience.

Note G – Debt

At July 2, 2016 and December 31, 2015, short-term borrowings of $111,259 and $44,024, respectively, were primarily utilized to support the working capital requirements. The weighted-average interest rate on these borrowings was .94% and 3.30% at July 2, 2016 and December 31, 2015, respectively.


11

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Long-term debt consists of the following:
 
 
July 2,
2016
 
December 31,
2015
Revolving credit facility
 
$
45,000

 
$
72,000

Asset securitization program
 
335,000

 
75,000

6.875% senior debentures, due 2018
 
199,117

 
198,886

3.00% notes, due 2018
 
298,602

 
298,197

6.00% notes, due 2020
 
299,058

 
298,932

5.125% notes, due 2021
 
248,705

 
248,566

3.50% notes, due 2022
 
345,415

 
345,061

4.50% notes, due 2023
 
296,417

 
296,194

4.00% notes, due 2025
 
344,356

 
344,092

7.50% senior debentures, due 2027
 
198,440

 
198,366

Interest rate swaps designated as fair value hedges
 
2,252

 
711

Other obligations with various interest rates and due dates
 
6,641

 
4,570

 
 
$
2,619,003

 
$
2,380,575


The 7.50% senior debentures are not redeemable prior to their maturity.  The 6.875% senior debentures, 3.00% notes, 6.00% notes, 5.125% notes, 3.50% notes, 4.50% notes, and 4.00% notes may be called at the option of the company subject to "make whole" clauses.

The estimated fair market value, using quoted market prices, is as follows:
 
 
July 2,
2016
 
December 31,
2015
6.875% senior debentures, due 2018
 
$
216,000

 
$
218,000

3.00% notes, due 2018
 
303,000

 
303,000

6.00% notes, due 2020
 
332,500

 
330,000

5.125% notes, due 2021
 
270,500

 
267,500

3.50% notes, due 2022
 
358,000

 
343,000

4.50% notes, due 2023
 
319,500

 
309,000

4.00% notes, due 2025
 
358,500

 
336,000

7.50% senior debentures, due 2027
 
252,500

 
238,000


The carrying amount of the company's short-term borrowings in various countries, revolving credit facility, asset securitization program, and other obligations approximate their fair value.

The company has a $1,500,000 revolving credit facility maturing in December 2018. This facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness and acquisitions, and as support for the company's commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread (1.30% at July 2, 2016), which is based on the company's credit ratings, or an effective interest rate of 1.71% at July 2, 2016. The facility fee, which is based on the company's credit ratings, was .20% at July 2, 2016.  The company had $45,000 and $72,000 in outstanding borrowings under the revolving credit facility at July 2, 2016 and December 31, 2015, respectively.

The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to $900,000 under the asset securitization program, which matures in March 2017. The outstanding borrowings have been classified as long-term debt as of July 2, 2016 based on the company’s intent and ability to refinance on a long-term basis by borrowing funds under the revolving credit facility or through refinancing the existing asset securitization program on a long-term basis. The asset securitization program is conducted through Arrow Electronics Funding Corporation ("AFC"), a wholly-

12

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread (.40% at July 2, 2016), which is based on the company's credit ratings, or an effective interest rate of .95% at July 2, 2016. The facility fee is .40%.

At July 2, 2016 and December 31, 2015, the company had $335,000 and $75,000, respectively, in outstanding borrowings under the asset securitization program, which was included in "Long-term debt" in the company's consolidated balance sheets. Total collateralized accounts receivable of approximately $1,729,000 and $1,871,831, respectively, were held by AFC and were included in "Accounts receivable, net" in the company's consolidated balance sheets. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings before repayment of any outstanding borrowings under the asset securitization program.

Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of July 2, 2016 and is currently not aware of any events that would cause non-compliance with any covenants in the future.  

During February 2015, the company completed the sale of $350,000 principal amount of 3.50% notes due in 2022 and $350,000 principal amount of 4.00% notes due in 2025. The net proceeds of the offering of $688,162 were used to refinance the company's 3.375% notes due November 2015 and for general corporate purposes.

During February 2015, the company redeemed $250,000 principal amount of its 3.375% notes due November 2015. The related loss on the redemption for 2015 was $2,943 and was recognized as a loss on prepayment of debt, which was included in "Other expense, net" in the company's consolidated statements of operations.

The company has a $100,000 uncommitted line of credit. There were no outstanding borrowings under the uncommitted line of credit at July 2, 2016 and December 31, 2015.

Interest and other financing expense, net, includes interest and dividend income of $1,376 and $3,390 for the second quarter and first six months of 2016, respectively. Interest and other financing expense, net, includes interest and dividend income of $1,489 and $2,462 for the second quarter and first six months of 2015, respectively.

Note H – Financial Instruments Measured at Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  The fair value hierarchy has three levels of inputs that may be used to measure fair value:

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.


13

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The following table presents assets (liabilities) measured at fair value on a recurring basis at July 2, 2016:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale securities
 
$
35,980

 
$

 
$

 
$
35,980

Interest rate swaps
 

 
2,252

 

 
2,252

Foreign exchange contracts
 

 
2,139

 

 
2,139

Contingent consideration
 

 

 
(2,522
)
 
(2,522
)
 
 
$
35,980

 
$
4,391

 
$
(2,522
)
 
$
37,849


The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2015:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale securities
 
$
41,178

 
$

 
$

 
$
41,178

Interest rate swaps
 

 
711

 

 
711

Foreign exchange contracts
 

 
(738
)
 

 
(738
)
Contingent consideration
 

 

 
(3,889
)
 
(3,889
)
 
 
$
41,178

 
$
(27
)
 
$
(3,889
)
 
$
37,262


Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (see Note C). The company tests these assets for impairment if indicators of potential impairment exist. 

During the first six months of 2016 and 2015, there were no transfers of assets (liabilities) measured at fair value between the three levels of the fair value hierarchy.

Available-For-Sale Securities

The company has an 8.4% equity ownership interest in Marubun Corporation ("Marubun") and a portfolio of mutual funds with quoted market prices, all of which are accounted for as available-for-sale securities.

The fair value of the company's available-for-sale securities is as follows:
 
 
July 2, 2016
 
December 31, 2015
  
 
Marubun
 
Mutual Funds
 
Marubun
 
Mutual Funds
Cost basis
 
$
10,016

 
$
17,485

 
$
10,016

 
$
17,389

Unrealized holding gain
 
3,239

 
5,240

 
8,708

 
5,065

Fair value
 
$
13,255

 
$
22,725

 
$
18,724

 
$
22,454


The fair value of these investments are included in "Other assets" in the company's consolidated balance sheets, and the related unrealized holding gains or losses are included in "Accumulated other comprehensive loss" in the shareholders' equity section in the company's consolidated balance sheets.

Derivative Instruments

The company uses various financial instruments, including derivative instruments, for purposes other than trading.  Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.

Interest Rate Swaps

The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. The company uses the hypothetical derivative method to assess the effectiveness of its interest rate swaps on a quarterly basis. The effective portion of

14

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

the change in the fair value of interest rate swaps designated as fair value hedges is recorded as a change to the carrying value of the related hedged debt, and the effective portion of the change in fair value of interest rate swaps designated as cash flow hedges is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive loss." The ineffective portion of the interest rate swap, if any, is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations.

In January 2015, the company entered into four seven-year forward-starting interest rate swaps (the "2015 swaps") which locked in an average treasury rate of 1.98% on a total aggregate notional amount of $200,000. These 2015 swaps were designated as cash flow hedges and managed the risk associated with changes in treasury rates and the impact of future interest payments on the anticipated debt issuances to replace the company's 3.375% notes due to mature in November 2015. In February 2015, the company received $896 in connection with the termination of the 2015 swaps upon issuance of the seven-year notes due in 2022. The fair value of the 2015 swaps is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive loss" and is being reclassified into income over the seven-year term of the notes due in 2022. For the 2015 swaps, the company reclassified into income $30 and $59 for the second quarter and first six months of 2016, respectively. The company reclassified into income $30 and $39 for the second quarter and first six months of 2015, respectively.

In April 2014, the company entered into an interest rate swap, with a notional amount of $50,000. The swap modifies the company's interest rate exposure by effectively converting a portion of the fixed 6.00% notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective interest rate of 4.88% at July 2, 2016), through its maturity. The swap is classified as a fair value hedge and had a fair value of $1,758 at July 2, 2016.

In April 2014, the company entered into an interest rate swap, with a notional amount of $50,000. The swap modifies the company's interest rate exposure by effectively converting a portion of the fixed 6.875% senior debentures to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective interest rate of 6.41% at July 2, 2016), through its maturity. The swap is classified as a fair value hedge and had a fair value of $494 at July 2, 2016.

Foreign Exchange Contracts

The company enters into foreign exchange forward, option, or swap contracts (collectively, the "foreign exchange contracts") to mitigate the impact of changes in foreign currency exchange rates.  These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions.  The fair value of the foreign exchange contracts are estimated using market quotes.  The notional amount of the foreign exchange contracts at July 2, 2016 and December 31, 2015 was $367,332 and $382,025, respectively.


15

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The fair values of derivative instruments in the company's consolidated balance sheets are as follows:
 
 
Asset (Liability) Derivatives
  
 
  
 
Fair Value
  
 
Balance Sheet
Location
 
July 2,
2016
 
December 31,
2015
Derivative instruments designated as hedges:
 
 
 
 
 
 
Interest rate swaps designated as fair value hedges
 
Other liabilities
 
$

 
$

Interest rate swaps designated as fair value hedges
 
Other assets
 
2,252

 
711

Foreign exchange contracts designated as cash flow hedges
 
Other current assets
 
77

 
896

Foreign exchange contracts designated as cash flow hedges
 
Accrued expenses
 
(874
)
 
(572
)
Total derivative instruments designated as hedging instruments
 
 
 
1,455

 
1,035

Derivative instruments not designated as hedges:
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets
 
4,764

 
1,729

Foreign exchange contracts
 
Accrued expenses
 
(1,828
)
 
(2,791
)
Total derivative instruments not designated as hedging instruments
 
 
 
2,936

 
(1,062
)
Total
 
 
 
$
4,391

 
$
(27
)
 
The effect of derivative instruments on the company's consolidated statements of operations is as follows:
 
 
Gain (Loss) Recognized in Income
  

Quarter Ended

Six Months Ended
  
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts (a)
 
$
4,660

 
$
(1,187
)
 
$
1,612

 
$
(379
)
  Total
 
$
4,660

 
$
(1,187
)
 
$
1,612

 
$
(379
)


16

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

 
 
Cash Flow Hedges
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2, 2016
 
July 2, 2016
 
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
Effective portion:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$

 
$
543

 
$

 
$
(534
)
Loss reclassified into income
 
$
(150
)
 
$
(469
)
 
$
(299
)
 
$
(1,091
)
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
Quarter Ended
 
Six Months Ended
 
 
June 27, 2015
 
June 27, 2015
 
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
Effective portion:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
$

 
$
(2,245
)
 
$
827

 
$
437

Gain (loss) reclassified into income
 
$
(141
)
 
$
163

 
$
(302
)
 
$
(678
)
Ineffective portion:
 
 
 
 
 
 
 
 
Gain recognized in income
 
$

 
$

 
$
69

 
$


(a)
The amount of gain (loss) recognized in income on derivatives is recorded in "Cost of sales" in the company's consolidated statements of operations.
(b)
Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations. The gain (loss) amounts reclassified into income relate to the termination of swaps.
(c)
Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Cost of sales" in the company's consolidated statements of operations.

Other

The carrying amount of cash and cash equivalents, accounts receivable, net, and accounts payable approximate their fair value due to the short maturities of these financial instruments.

Note I – Restructuring, Integration, and Other Charges

The following table presents the components of the restructuring, integration, and other charges:
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Restructuring and integration charges - current period actions
 
$
7,652

 
$
9,875

 
$
10,103

 
$
19,185

Restructuring and integration charges - actions taken in prior periods
 
1,838

 
268

 
3,961

 
678

Other charges
 
6,616

 
7,004

 
22,830

 
13,480

 
 
$
16,106

 
$
17,147

 
$
36,894

 
$
33,343



17

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

2016 Restructuring and Integration Charges

The following table presents the components of the 2016 restructuring and integration charges and activity in the related restructuring and integration accrual for the first six months of 2016:
 
 
Personnel
Costs
 
Facilities Costs
 
Other
 
Total
Restructuring and integration charges
 
$
7,529

 
$
2,473

 
$
101

 
$
10,103

Payments
 
(2,696
)
 
(312
)
 
(75
)
 
(3,083
)
Foreign currency translation
 
(113
)
 
(12
)
 
(15
)
 
(140
)
Balance as of July 2, 2016
 
$
4,720

 
$
2,149

 
$
11

 
$
6,880


These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations.

2015 Restructuring and Integration Charges

The following table presents the activity in the restructuring and integration accrual for the first six months of 2016 related to the 2015 restructuring and integration:
 
 
Personnel 
Costs
 
Facilities Costs
 
Other
 
Total
Balance as of December 31, 2015
 
$
16,321

 
$
403

 
$
159

 
$
16,883

Restructuring and integration charges
 
1,830

 
2,209

 

 
4,039

Payments
 
(13,982
)
 
(440
)
 
(31
)
 
(14,453
)
Foreign currency translation
 
(18
)
 
2

 

 
(16
)
Balance as of July 2, 2016
 
$
4,151

 
$
2,174

 
$
128

 
$
6,453


Restructuring and Integration Accruals Related to Actions Taken Prior to 2015

The following table presents the activity in the restructuring and integration accruals for the first six months of 2016 related to restructuring and integration actions taken prior to 2015:
 
 
Personnel
Costs
 
Facilities Costs
 
Other
 
Total
Balance as of December 31, 2015
 
$
2,754

 
$
2,341

 
$

 
$
5,095

Restructuring and integration charges (credits)
 
(308
)
 
(64
)
 
294

 
(78
)
Payments
 
(981
)
 
(964
)
 
(378
)
 
(2,323
)
Foreign currency translation
 
40

 
(19
)
 
84

 
105

Balance as of July 2, 2016
 
$
1,505

 
$
1,294

 
$

 
$
2,799


Restructuring and Integration Accrual Summary

In summary, the restructuring and integration accruals aggregate $16,132 at July 2, 2016, all of which are expected to be spent in cash, and are expected to be utilized as follows:

The accruals for personnel costs totaling $10,376 relate to the termination of personnel that have scheduled payouts of $7,908 in 2016, $2,129 in 2017, $306 in 2018, $17 in 2019, and $16 in 2020.

The accruals for facilities totaling $5,617 relate to vacated leased properties that have scheduled payments of $4,016 in 2016, $813 in 2017, $667 in 2018, and $121 in 2019.

18

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


Other accruals of $139 are expected to be spent within one year.

Other Charges

Included in restructuring, integration, and other charges for the second quarter and first six months of 2016 are fraud loss, acquisition-related, and other expenses of $6,616 and $22,830, respectively. The company determined that it was the target of criminal fraud by persons impersonating a company executive, which resulted in unauthorized transfers of cash from a company account in Europe to outside bank accounts in Asia in January 2016.  An independent investigation and legal actions by the company and law enforcement are ongoing.  To date, the information gathered by the company indicates that this is an isolated event not associated with a security breach or loss of data.  Additionally, no officers or employees of the company were involved in the fraud. During the first six months of 2016, the Company recorded a fraud loss, net of insurance recoveries, of $3,942. During the second quarter of 2016, the company recorded a credit of $9,253, which included insurance recoveries and incremental expenses related to the fraud loss. Included within “Other current assets” is approximately $29,000 of cash frozen in outside bank accounts that the company believes is probable of recovery. The charges for the second quarter and first six months of 2016 of $3,334 and $4,956, respectively, related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity. During 2016, the company adopted an amendment to its Wyle defined benefit plan and incurred a settlement expense of $12,211 during the second quarter of 2016.

Included in restructuring, integration, and other charges for the second quarter and first six months of 2015 are acquisition-related expenses of $7,004 and $13,480, respectively, consisting of charges related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional fees directly related to recent acquisition activity.

Note J – Net Income per Share

The following table presents the computation of net income per share on a basic and diluted basis (shares in thousands):
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Net income attributable to shareholders
 
$
134,270

 
$
123,932

 
$
240,505

 
$
229,990

Weighted-average shares outstanding - basic
 
91,782

 
95,638

 
91,647

 
95,776

Net effect of various dilutive stock-based compensation awards
 
911

 
1,011

 
1,124

 
1,098

Weighted-average shares outstanding - diluted
 
92,693

 
96,649

 
92,771

 
96,874

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.46

 
$
1.30

 
$
2.62

 
$
2.40

Diluted (a)
 
$
1.45

 
$
1.28

 
$
2.59

 
$
2.37


(a)
Stock-based compensation awards for the issuance of 848,000 and 987,000 shares for the second quarter and first six months of 2016 and 709,000 and 607,000 shares for the second quarter and first six months of 2015, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.

19

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


Note K – Shareholders' Equity

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in Accumulated other comprehensive income (loss), excluding non-controlling interests:
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Foreign Currency Translation Adjustment:
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications (a)
 
$
(50,181
)
 
$
47,890

 
$
19,788

 
$
(151,338
)
Amounts reclassified into income
 
(111
)
 
(163
)
 
1,091

 
678

Unrealized Gain (Loss) on Investment Securities, Net:
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
(2,030
)
 
2,169

 
(3,681
)
 
2,293

Amounts reclassified into income
 

 

 

 

Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net:
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 

 
(346
)
 

 
550

Amounts reclassified into income
 
93

 
116

 
184

 
143

Employee Benefit Plan Items, Net:
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 
31

 
35

 
72

 
69

Amounts reclassified into income
 
3,813

 
847

 
4,692

 
1,655

Net change in Accumulated other comprehensive income (loss)
 
$
(48,385
)
 
$
50,548

 
$
22,146

 
$
(145,950
)

(a)
Includes intra-entity foreign currency transactions that are of a long-term investment nature of $3,982 and $(28,819) for the second quarter and first six months of 2016 and $600 and $45,863 for the second quarter and first six months of 2015, respectively.

Share-Repurchase Program

In September 2015, the company's Board approved a repurchase of up to $400,000 of the company's common stock. As of July 2, 2016, the company repurchased 1,982,894 shares under the program with a market value of $113,778 at the dates of repurchase, of which 506,670 shares with a market value of $31,060 were repurchased during the second quarter of 2016.

Note L – Employee Benefit Plans

In 2016, the company adopted an amendment to its Wyle defined benefit plan that provided eligible plan participants with the option to receive an early distribution of their pension benefits. Lump sum payments of $26,063 were made during June 2016 and the company incurred a settlement expense of $12,211.


20

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


The components of the net periodic benefit costs for the Wyle defined benefit plan are as follows:

 
 
Quarter Ended
 
Six Months Ended
 
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Components of net periodic benefit costs:
 
 
 
 
 
 
 
 
Service cost
 
$

 
$

 
$

 
$

Interest cost
 
1,328

 
1,330

 
2,656

 
2,659

Expected return on plan assets
 
(1,538
)
 
(1,790
)
 
(3,076
)
 
(3,580
)
Amortization of net loss
 
443

 
417

 
885

 
834

Amortization of prior service cost
 

 

 

 

Net periodic benefit costs
 
233

 
(43
)
 
465

 
(87
)
Settlement charge
 
12,211

 

 
12,211

 

Net benefit costs
 
$
12,444

 
$
(43
)
 
$
12,676

 
$
(87
)

Note M – Contingencies

Environmental Matters

In connection with the purchase of Wyle in August 2000, the company acquired certain of the then outstanding obligations of Wyle, including Wyle's indemnification obligations to the purchasers of its Wyle Laboratories division for environmental clean-up costs associated with any then existing contamination or violation of environmental regulations. Under the terms of the company's purchase of Wyle from the sellers, the sellers agreed to indemnify the company for certain costs associated with the Wyle environmental obligations, among other things. As part of the settlement agreement, the company accepted responsibility for any potential subsequent costs incurred related to the Wyle matters. The company is aware of two Wyle Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater was identified and will require environmental remediation. In addition, the company was named as a defendant in several lawsuits related to the Norco facility and a third site in El Segundo, California which have now been settled to the satisfaction of the parties.

The company expects these environmental liabilities to be resolved over an extended period of time. Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation, improvements in remediation technologies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently fully estimate the ultimate potential costs related to these sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed and, in some instances, implemented. To the extent that future environmental costs exceed amounts currently accrued by the company, net income would be adversely impacted and such impact could be material.

Accruals for environmental liabilities are included in "Accrued expenses" and "Other liabilities" in the company's consolidated balance sheets.

As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately $37,000 from certain insurance carriers relating to environmental clean-up matters at the Norco site. The company is considering the best way to pursue its potential claims against insurers regarding liabilities arising out of operations at Huntsville. The resolution of these matters will likely take several years. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time.

The company believes the settlement amount together with potential recoveries from various insurance policies covering environmental remediation and related litigation will be sufficient to cover any potential future costs related to the Wyle acquisition; however, it is possible unexpected costs beyond those anticipated could occur.


21

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Environmental Matters - Huntsville

In February 2015, the company and the Alabama Department of Environmental Management ("ADEM") finalized and executed a consent decree in connection with the Huntsville, Alabama site. Characterization of the extent of contaminated soil and groundwater continues at the site. Under the direction of the ADEM, approximately $5,000 was spent to date. The pace of the ongoing remedial investigations, project management, and regulatory oversight is likely to increase somewhat and, though the complete scope of the activities is not yet known, the company currently estimates additional investigative and related expenditures at the site of approximately $300 to $750. The nature and scope of both feasibility studies and subsequent remediation at the site has not yet been determined, but assuming the outcome includes source control and certain other measures, the cost is estimated to be between $3,000 and $4,000.

Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work is not yet known, and, accordingly, the associated costs have yet to be determined.

Environmental Matters - Norco

In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control (the "DTSC") in connection with the Norco site. In April 2005, a Remedial Investigation Work Plan was approved by DTSC that provided for site-wide characterization of known and potential environmental issues. Investigations performed in connection with this work plan and a series of subsequent technical memoranda continued until the filing of a final Remedial Investigation Report early in 2008. Work is under way pertaining to the remediation of contaminated groundwater at certain areas on the Norco site and of soil gas in a limited area immediately adjacent to the site. In 2008, a hydraulic containment system was installed to capture and treat groundwater before it moves into the adjacent offsite area. In September 2013, the DTSC approved the final Remedial Action Plan ("RAP") and work is currently progressing under the RAP. The approval of the RAP includes the potential for additional remediation action after the five year review of the hydraulic containment system if the review finds that contaminants have not been sufficiently reduced in the offsite area.

Approximately $50,000 was spent to date on remediation, project management, regulatory oversight, and investigative and feasibility study activities. The company currently estimates that these activities will give rise to an additional $12,400 to $24,500. Project management and regulatory oversight include costs incurred by project consultants for project management and costs billed by DTSC to provide regulatory oversight.

Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work under the RAP is not yet known, and, accordingly, the associated costs have yet to be determined.

Tekelec Matter

In 2000, the company purchased Tekelec Europe SA ("Tekelec") from Tekelec Airtronic SA and certain other selling shareholders. Subsequent to the closing of the acquisition, Tekelec received a product liability claim in the amount of €11,333. The product liability claim was the subject of a French legal proceeding started by the claimant in 2002, under which separate determinations were made as to whether the products that are subject to the claim were defective and the amount of damages sustained by the purchaser. The manufacturer of the products also participated in this proceeding. The claimant commenced legal proceedings against Tekelec and its insurers to recover damages in the amount of €3,742 and expenses of €312 plus interest. In May 2012, the French court ruled in favor of Tekelec and dismissed the plaintiff's claims. In January 2015, the Court of Appeals confirmed the French court's ruling; however, the ruling remains subject to a final appeal by the plaintiff. The company believes that any amount in addition to the amount accrued by the company would not materially adversely impact the company's consolidated financial position, liquidity, or results of operations.

Antitrust Investigation
On January 21, 2014, the company received a Civil Investigative Demand in connection with an investigation by the Federal Trade Commission ("FTC") relating generally to the use of a database program (the “database program”) that has operated for more than ten years under the auspices of the Global Technology Distribution Council ("GTDC"), a trade group of which the company is a member. Under the database program, certain members of the GTDC who participate in the program provide sales data to a third

22

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

party independent contractor chosen by the GTDC. The data is aggregated by the third party and the aggregated data is made available to the program participants. The company understands that other members participating in the database program have received similar Civil Investigative Demands.

In April 2014, the company responded to the Civil Investigative Demand. The Civil Investigative Demand merely sought information, and no proceedings have been instituted against any person. The company continues to believe that there has not been any conduct by the company or its employees that would be actionable under the antitrust laws in connection with its participation in the database program. At this time, it is not possible to predict the potential impact, if any, of the Civil Investigative Demand or whether any actions may be instituted by the FTC against any person.

Other

From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company's consolidated financial position, liquidity, or results of operations.

Note N – Segment and Geographic Information

The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions.  The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment.  As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings, are not directly attributable to the individual operating segments and are included in the corporate business segment.

Sales and operating income (loss), by segment, are as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Sales:
 
 
 
 
 
 
 
 
Global components
 
$
3,832,972

 
$
3,698,175

 
$
7,508,901

 
$
7,044,938

Global ECS
 
2,139,129

 
2,131,814

 
3,937,377

 
3,787,436

Consolidated
 
$
5,972,101

 
$
5,829,989

 
$
11,446,278

 
$
10,832,374

Operating income (loss):
 
 

 
 

 
 
 
 
Global components
 
$
178,385

 
$
169,817

 
$
349,155

 
$
334,712

Global ECS
 
109,399

 
98,394

 
187,611

 
165,911

Corporate (a)
 
(64,192
)
 
(61,268
)
 
(131,810
)
 
(116,246
)
Consolidated
 
$
223,592

 
$
206,943

 
$
404,956

 
$
384,377


(a)
Includes restructuring, integration, and other charges of $16,106 and $36,894 for the second quarter and first six months of 2016 and $17,147 and $33,343 for the second quarter and first six months of 2015, respectively.

Total assets, by segment, are as follows:
 
 
July 2,
2016
 
December 31,
2015
Global components
 
$
7,887,307

 
$
7,276,143

Global ECS
 
4,335,613

 
5,074,529

Corporate
 
723,886

 
671,258

Consolidated
 
$
12,946,806

 
$
13,021,930



23

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Sales, by geographic area, are as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
July 2,
2016
 
June 27,
2015
 
July 2,
2016
 
June 27,
2015
Americas (b)
 
$
2,809,558

 
$
2,912,126

 
$
5,430,035

 
$
5,374,315

EMEA (c)
 
1,777,026

 
1,665,013

 
3,442,906

 
3,169,937

Asia/Pacific
 
1,385,517

 
1,252,850

 
2,573,337

 
2,288,122

Consolidated
 
$
5,972,101

 
$
5,829,989

 
$
11,446,278

 
$
10,832,374


(b)
Includes sales related to the United States of $2,591,296 and $4,987,359 for the second quarter and first six months of 2016 and $2,702,783 and $4,953,205 for the second quarter and first six months of 2015, respectively.

(c)
Defined as Europe, the Middle East, and Africa.

Net property, plant, and equipment, by geographic area, is as follows:
 
 
July 2,
2016
 
December 31,
2015
Americas (d)
 
$
613,475

 
$
582,973

EMEA
 
90,547

 
88,727

Asia/Pacific
 
33,529

 
28,478

Consolidated
 
$
737,551

 
$
700,178


(d)
Includes net property, plant, and equipment related to the United States of $609,633 and $580,791 at July 2, 2016 and December 31, 2015, respectively.

24


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Arrow Electronics, Inc. (the "company") is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions.  The company provides one of the broadest product offerings in the electronic components and enterprise computing solutions industries and a wide range of value-added services to help customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions business segment.  The company provides electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment.  For the first six months of 2016, approximately 66% of the company's sales were from the global components business segment and approximately 34% of the company's sales were from the global ECS business segment.

The company's financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, and increase return on invested capital. To achieve its objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies. To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product and value-added service offerings, increase its market penetration, and/or expand its geographic reach.

Executive Summary

Consolidated sales for the second quarter and first six months of 2016 increased by 2.4% and 5.7%, respectively, compared with the year-earlier period. The increase for the second quarter of 2016 was driven by an increase in the global components business segment sales of 3.6%. The increase for the first six months of 2016 was driven by an increase in the global components business segment sales of 6.6% and an increase in the global ECS business segment sales of 4.0%. Adjusted for the change in foreign currencies and acquisitions, consolidated sales increased 1.6% for the first six months of 2016, compared with the year-earlier period.

Net income attributable to shareholders increased to $134.3 million and $240.5 million in the second quarter and first six months of 2016, respectively, compared to $123.9 million and $230.0 million in the year-earlier periods. The following items impacted the comparability of the company's results:

Second quarters of 2016 and 2015:

restructuring, integration, and other charges of $16.1 million in 2016 and $17.1 million in 2015;
identifiable intangible asset amortization of $14.4 million in 2016 and $13.9 million in 2015; and
a loss on investment of $1.5 million in 2015.

First six months of 2016 and 2015:

restructuring, integration, and other charges of $36.9 million in 2016 and $33.3 million in 2015;
identifiable intangible asset amortization of $27.4 million in 2016 and $25.0 million in 2015;
a loss on prepayment of debt of $2.9 million in 2015;
a gain on sale of investment of $2.0 million in 2015; and
a loss on investment of $1.5 million in 2015.

Excluding the aforementioned items, net income attributable to shareholders for the second quarter and first six months of 2016 increased to $152.7 million and $285.0 million, respectively, compared with $148.9 million and $276.7 million in the year-earlier periods.

Certain Non-GAAP Financial Information

In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the company also discloses certain non-GAAP financial information, including:

Sales, income, or expense items as adjusted for the impact of changes in foreign currencies (referred to as "impact of changes in foreign currencies") and the impact of acquisitions by adjusting the company's operating results for businesses acquired, including the amortization expense related to acquired intangible assets, as if the acquisitions had occurred at the beginning of the earliest period presented (referred to as "impact of acquisitions");

25


Operating income as adjusted to exclude identifiable intangible asset amortization and restructuring, integration, and other charges; and
Net income attributable to shareholders as adjusted to exclude identifiable intangible asset amortization, restructuring, integration, and other charges, loss on prepayment of debt, and gain on sale of investment.

Management believes that providing this additional information is useful to the reader to better assess and understand the company's operating performance, especially when comparing results with previous periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.

Sales

Substantially all of the company's sales are made on an order-by-order basis, rather than through long-term sales contracts.  As such, the nature of the company's business does not provide for the visibility of material forward-looking information from its customers and suppliers beyond a few months.

Following is an analysis of net sales by reportable segment (in millions):
 
Quarter Ended
 
 
 
Six Months Ended
 
 
 
July 2, 2016
 
June 27, 2015
 
Change
 
July 2, 2016
 
June 27, 2015
 
Change
Consolidated sales, as reported
$
5,972

 
$
5,830

 
2.4
 %
 
$
11,446

 
$
10,832

 
5.7
%
Impact of changes in foreign currencies

 
(1
)
 
 
 

 
(61
)
 
 
Impact of acquisitions

 
163

 
 
 
38

 
532

 
 
Consolidated sales, as adjusted*
$
5,972

 
$
5,992

 
flat

 
$
11,485

 
$
11,303

 
1.6
%
 
 
 
 
 
 
 

 

 
 
Global components sales, as reported
$
3,833

 
$
3,698

 
3.6
 %
 
$
7,509

 
$
7,045

 
6.6
%
Impact of changes in foreign currencies

 
(6
)
 
 
 

 
(46
)
 
 
Impact of acquisitions

 
96

 
 
 

 
314

 
 
Global components sales, as adjusted*
$
3,833

 
$
3,788

 
1.2
 %
 
$
7,509

 
$
7,313

 
2.7
%
 
 
 
 
 
 
 

 

 
 
Global ECS sales, as reported
$
2,139

 
$
2,132

 
flat

 
$
3,937

 
$
3,787

 
4.0
%
Impact of changes in foreign currencies

 
5

 
 
 

 
(15
)
 
 
Impact of acquisitions

 
67

 
 
 
38

 
218

 
 
Global ECS sales, as adjusted*
$
2,139

 
$
2,204

 
(2.9
)%
 
$
3,976

 
$
3,990

 
flat


* The sum of the components for consolidated sales, as adjusted, may not agree to totals, as presented, due to rounding.

Consolidated sales for the second quarter and first six months of 2016 increased by $142.1 million, or 2.4%, and $613.9 million, or 5.7%, respectively, compared with the year-earlier period. The increase for the second quarter of 2016 was driven by an increase in global components business segment sales of $134.8 million